Reflecting on the Wimbledon effect

In my youth a quarter of the globe was coloured red - not for the communist bloc, but for the British empire. Times have changed, and instead of owning or running a quarter of the world, we appear to be up for sale to the rest of the world.

Hardly a week seems to go by without the purchase of some famous British company or privatised utility - the other week it was 'the Spanish acquisition' as Ferrovial beat Goldman Sachs in the fight for BAA (the former British Airports Authority).

The general impression is confirmed by official figures from the Organisation for Economic Cooperation and Development, which show that the UK received more 'inward investment' than any other member country of the OECD 'market economy' club (there are 30 members), most of this investment constituting takeovers and acquisitions. (No wonder Takeover Target was a prominent runner at Ascot recently.)

The official attitude is that 'it doesn't matter who owns it as long as it operates here' - sometimes known (topically) as 'the Wimbledon effect'. The 'economic patriotism' of France is scorned by the Chancellor, although it has to be said that France does rather try to have it both ways: the same OECD survey finds that last year France itself was the biggest overseas investor among the OECD group, not least in the UK.

There is also the fact that UK companies have substantial investments overseas, and the income on those investments goes some way - but not all - to offsetting the impact of our chronic trade deficits.

But, whatever the composition of the ownership of the British economy, it is British governments who run it, and Chancellors of the Exchequer in particular. Last year Sir Howard Davies, director-general of the London School of Economics, had the interesting idea of inviting some of Gordon Brown's predecessors to offer recollections of their period in office. I am delighted that these lectures are due to be published in the autumn, under the title The Chancellor's Tales. Among the high spots were Denis Healey's (chancellor 1974-79) reminiscences of just how difficult it was being responsible for the British economy after the first oil crisis of 1973-74, and how his most difficult problems were 'with the unions'.

All chancellors naturally defend their records, and Nigel Lawson (1983- 89) blamed poor forecasting for the way the 'Lawson boom' caused such trouble, also arguing that the famous episode when the pound shadowed the D-mark in 1987-88 (much to Mrs Thatcher's chagrin) was not really responsible for the troubles for which he was blamed; rather, it was the lagged impact of the earlier credit explosion.

Interestingly, Lord Lawson did not dwell on the lasting impact of his 1988 budget (which seems to have guaranteed that no political party would ever dare to raise the top rate of tax above 40 per cent, and for which my old friend may well go down in history).

For Lawson the central aspect of the Treasury's work was control of public expenditure (some may say that these days the Treasury is too keen to spend rather than control, but they may have another think coming) and his lecture reminded people that, for all the criticism of Gordon Brown's reach in Whitehall, he is not the only chancellor to have had a finger in almost every government pie.

Kenneth Clarke's contribution was characteristically ebullient, with a comment about his experience at the Home Office, 'the most reactionary and slow-moving department in Whitehall'. It is a 'very distinguished department but it does not like telling its ministers too much about what it is doing, and above all it does not like ministers trying to change things'.

Clarke regarded his tenure as 'a total contrast to that of my successor, Gordon Brown, who only speaks to people who agree with him, whereas I am a combative personality who likes debating'.

Clarke thinks the achievements of the independent Bank of England are all very well, but the difficult bit was not so much keeping inflation down (which the Bank is widely credited for) as getting it down.

He also makes it quite clear that, when criticised by Labour for not raising interest rates before the election, he was seriously concerned about the overvaluation of the pound in 1996-97.

The overvaluation has gone on and on. David Cobham in the current Economic Journal ('The overvaluation of sterling since 1996: how the policy makers responded and why') gives interesting historical comparisons of the impact of the overvaluation on the pattern of growth. During 'the long boom' from 1948 to 1973, UK manufacturing grew at an average of 3.4 per cent per annum, services at 2.4 per cent and total output (GDP) at 3.1 per cent.

Manufacturing was badly hit by the recessions of 1980-81 and 1990-92, but between 1992 and 1996 it grew by 2.1 per cent a year, services by 3.5 per cent and GDP by 3.1 per cent. From 1996 to 2004, however, the rate of growth of manufacturing was a mere 0.3 per cent a year, compared with 3.6 per cent for services and 2.7 per cent for GDP.

Now, it is all very well saying there is a long-run shift to services, and the 'China factor' means the decline of manufacturing is inevitable. But it is not inevitable for countries such as Germany. The economist Christopher Smallwood points out that UK exports to the fast-growing markets of Asia are no higher now than they were in 1997, whereas Germany's exports to Asia have risen by more than 50 per cent.

Again, OECD figures show that between 2000 and the first quarter of this year manufacturing output in the much maligned German economy grew by 10 per cent, whereas it was 4 per cent lower in the UK.

The much praised independent Bank of England has, with the help of globalisation, done well on the inflation front. But there are some longer-term problems out there in the real economy.